Home Truths

Transcript

On the eve of the Federal Budget, Four Corners reports on the white hot issues of housing affordability and negative gearing and the generation left wondering if they will ever own their own home.

"We will start it at 1.1 million dollars ladies and gentlemen."Auctioneer

A house with a million dollar price tag used to be confined to the super wealthy suburbs in Australia's biggest cities. Today, properties with that sort of asking price are commonplace, even in the urban fringes, with little infrastructure and lengthy commute times.

In Melbourne, the median house price is $700 thousand dollars, around 10 times the average wage. In Sydney, there are suburbs more expensive than Manhattan. It's why the IMF declared Australia one of the most expensive countries in the world to buy property in.

This week reporter Ben Knight explores the housing crisis locking younger people out of home ownership and the negatively geared world of investors building their nest eggs.

"It's only money!"Auctioneer

He meets investors like Wayne and Karen who've created a multi-million dollar property portfolio from their dining room table.

"We saw them on the internet, we actually borrowed 105% using the equity we had in our house to fund that."Wayne & Karen

And the agents spruiking the investor-led property gold rush.

"Why are people looking at negative gearing? Because it's generous. It's a wonderful opportunity for people to become involved in property investment. It's a gift."Real Estate Adviser

With negative gearing and affordable housing shaping up as key issues in the forthcoming election, we look at the politics at work behind the major parties' policies.

The Coalition is banking on leaving negative gearing policy exactly the way it is. While the Labor Party is hoping its plan to wind it back will attract those first home buyers who feel locked out by the high price of property.

"We're not looking to buy an investment property. We want a house we can live in."Jules, House Hunter

But some economists are warning that there are property bubbles in our major cities which could wreak havoc on our economy.

"According to pretty much any housing market indicator you want to look at, house prices in Australia are significantly over valued."Investment Fund Manager

And there is worrying evidence of fraudulent loan applications which could leave banks and consumers dangerously exposed.

"They're lending to homebuyers that have no ability to be able to pay off their loan and they're basically depending on the property market to continue to rise at a consistent rate."Economist

While for some first home buyers, a housing crash is just what they are hoping for.

"Are we all done...?"Auctioneer

Home Truths, reported by Ben Knight and presented by Sarah Ferguson, goes to air on Monday 2nd May at 8.30pm EDT. It is replayed on Tuesday 3rd May at 10.00am and Wednesday 4th May at 11pm. It can also be seen on ABC News 24 on Saturday at 8.00pm AEST, ABC iview and at abc.net.au/4corners.

Transcript

Home Truths - 2 May 2016

SARAH FERGUSON, PRESENTER: Good evening and welcome to Four Corners. I'm Sarah Ferguson.

Tonight: has a generation been shut out of the Great Australian Dream?

It used to be that Australians would spend three or four times their annual income on a house. Now it's 10, 20, even 30 times, putting home ownership out of reach for many - and especially for young people.

The tax breaks that have helped fuel the unprecedented housing boom will be a big issue in the coming election campaign. Taken together, negative gearing and capital gains tax breaks cost the public purse an estimated $11.7 billion each year.

Labor has promised to wind back the concessions. But despite criticism of negative gearing from some Liberal politicians, including former treasurer Joe Hockey, Prime Minister Malcolm Turnbull has ruled out any changes to the system.

In tonight's program, experts say that Australia's housing market is already cooling. Economists are divided over whether we're seeing the start of a soft landing, a correction or a crash.

For many in the millennial generation, a crash is what they're waiting and hoping for.

Ben Knight reports.

(Footage of Ben Knight walking down suburban street in Melbourne)

BEN KNIGHT, REPORTER: Well, this is the first shot we're filming for this story - and we haven't had to go very far because this is my street in Melbourne. And the house next door is about to go to auction.

Since the end of the mining boom, construction and mortgage debt are now the biggest drivers of the Australian economy - and you can really get a sense of it from up here.

But the high prices go well beyond the harbour-side suburbs. In fact, they go all the way out to Sydney's western rim.

The drive to Kellyville can take more than an hour at peak hour: more if the traffic's really bad.

It might be out on the edge of the city, but Doug Driscoll has been doing very well selling property out here.

(Doug Driscoll gets out of a sports car to greet Ben)

BEN KNIGHT: G'day, Doug.

DOUG DRISCOLL, REAL ESTATE AGENT: Hi. How are you doin'?

BEN KNIGHT: Good, mate. How are you?

DOUG DRISCOLL: Yeah, very good indeed, thank you.

BEN KNIGHT: So this is Kellyville?

DOUG DRISCOLL: Kellyville, absolutely.

You're paying anywhere from about $800,000, all the way up through to about $1.25 million.

BEN KNIGHT (voiceover): He says the last two years have seen a once-in-a-lifetime property boom.

DOUG DRISCOLL: I mean, something would go on the market and literally within hours, er, there would be, you know, dozens of inquiries.

BEN KNIGHT (voiceover): Because by Sydney standards, this area is vaguely affordable. Closer to town? Forget it.

(Footage of Ben walking up to house for sale in Strathfield)

This is Strathfield: a sort of middle-ring, middle-class suburb of Sydney. And this is your classic three-bedroom family home on the good old quarter-acre block.

Now, it's on the market for $2.2 million, although it will probably go for more. But that means it is right on the median house price for this suburb.

But the median income for this suburb is $76,000. So that means this suburb has a price-to-income ratio of 29. In simple terms, it means that it takes 29 years, using every cent of a median salary, to buy a place like this. And that's before tax.

(Footage of Ron Cross delivering sales seminar to audience)

RON CROSS, TRENT PARK PROPERTY: The ageing population of people coming of age...

BEN KNIGHT (voiceover): This is now the biggest housing boom in Australia's history. And property is the new gold rush.

RON CROSS: So now is the time to make a move. Get in quickly when the door is open, because the door will shut very, very quickly.

BEN KNIGHT (voiceover): On a Thursday night in an outer suburb of Melbourne, property salesman Ron Cross is selling the investment dream.

RON CROSS: It doesn't matter if it doesn't go up in value - but it will, because you've got this massive cash flow.

Why are people looking at negative gearing? Because it is generous. It's a wonderful opportunity for people to become involved in property investment. It's a gift.

So the secret is to borrow money. So the young people in the audience tonight: don't be fearful of borrowing money.

Thank you so much.

(Audience applauds)

BEN KNIGHT (voiceover): And his message has hit home.

SEMINAR AUDIENCE MEMBER 1: Get into property as soon as you can.

SEMINAR AUDIENCE MEMBER 2: ...whether you should buy your home first or your investment property. And he said, "Definitely buy an investment property." That's something that's, that's very interesting.

BEN KNIGHT (voiceover): Jules McKendry has spent the past year trying to buy her first home.

(Julia is inside a cafe, looking at real estate ads on her computer. Ben joins her)

BEN KNIGHT: Jules, how are you?

JULES MCKENDRY: Good.

BEN KNIGHT: All right. So, you're back at it?

JULES MCKENDRY: Yeah.

BEN KNIGHT (voiceover): Jules isn't from a wealthy family. Her parents don't even own a house.

But at 25, she's managed to save $150,000 from her marketing job - and by boarding with her mum.

JULES McKENDRY: I wouldn't have thought that, with the savings I've got and the, the money I earn and the, sort of, the, the lifestyle I'm in: I wouldn't have thought I would be so far away from buying a house.

BEN KNIGHT: Do you think that, for your generation, that's something that just might not be a reality anymore?

JULES McKENDRY: If the prices keep doing what they're doing now, there's no way my kids own houses. To them it will be normal, because no-one will own houses.

BEN KNIGHT: But you feel...

JULES McKENDRY: No-one will buy them.

BEN KNIGHT: But you feel ripped off?

JULES McKENDRY: Oh, definitely.

BEN KNIGHT (voiceover): Jules McKendry spends every weekend looking at houses, while her partner Nathan is at work, helping to build up their deposit.

(Footage of Jules and Ben looking at house in Kilsyth, Melbourne)

BEN KNIGHT: It really kills your weekend, doesn't it?

JULES McKENDRY: Oh, it's what- it's, ah- it's pre- pretty much a full-time job. Like, other than what I do for work, this is what I do now.

(To real estate agent) How you going?

CHRIS, REAL ESTATE AGENT: Good morning. Welcome.

BEN KNIGHT: G'day.

CHRIS: I'm Chris.

BEN KNIGHT: Hi, Chris. Ben.

(Voiceover) Ten years ago their savings would have paid half the cost of a house like this. Not anymore.

But Jules knows what she wants.

(Footage of Jules and other people inspecting house)

JULES McKENDRY: I love the big windows. I love the fact that you can see all the green outside. So that obviously really attracts me when buying a property.

This wall here is the, um, walk-in robe for that bedroom. I would knock that out.

BEN KNIGHT: OK.

JULES McKENDRY: Um, there's a, there's a spa out there. So there's a spa in your front yard. I- There's no way I would keep that.

(Ben laughs)

(Footage of Jules and Ben walking onto backyard)

JULES McKENDRY: But this I love. Like, there's not... you can't complain when you've got this much backyard at all.

I want to be able to kick a footy around in the backyard. You know, on, on, Australia Day, set up, you know, a cricket game. Whatever: like, however it be.

BEN KNIGHT: You're talking about the great Australian dream?

JULES McKENDRY: Exactly right. Yep. Yeah.

BEN KNIGHT: You totally subscribe to that?

JULES McKENDRY (laughs): Yeah. That's exactly right.

You know, it is a three-bedroom, one-bathroom...

BEN KNIGHT (voiceover): This house in Kilsyth is 40 kilometres from Melbourne's CBD, but it's a lot closer to town than most people her age could even consider.

(To Jules) How many houses have you bid on?

JULES McKENDRY: Um, to date: more than 20.

BEN KNIGHT: How do you find the emotional energy?

JULES McKENDRY: You can't get emotionally attached to houses any more. You can look at them and go, "I could see myself living here," but I can't be in love with it. I can't envision my furniture in it: I can't do any of that. 'Cause otherwise every week I'd just be going, "Yeah, no. Yeah, no." And you can't do that. Like, you can't live your life being depressed every weekend 'cause you've m- missed out on another house.

BEN KNIGHT (voiceover): Her competition isn't other homebuyers: it's investors. It'll be the same with this property.

JULES McKENDRY: I think if we- ah, we won't purchase this house or a young couple doesn't purchase this house: I think less two years from now there'll be a house in the backyard.

BEN KNIGHT: Right. So you're thinking that this is who you're up against. You're up against the investor...

JULES McKENDRY: A hundred per cent.

BEN KNIGHT: …who just wants to subdivide.

JULES McKENDRY: Yeah, exactly right.

BEN KNIGHT: And so ha- have you lost out on auctions to investors before?

JULES McKENDRY: Oh, 100 per cent. Yes.

BEN KNIGHT (voiceover): This map of Melbourne shows the suburbs where more than half of the units are owned by investors.

JOHN ALEXANDER, LIBERAL MP: It appears that the investor - the opportunistic investor, buoyed by low interest rates - has dominated the market. And so first home buyers have really been unable to compete.

BEN KNIGHT (voiceover): John Alexander is the Liberal member for Bennelong in Sydney's inner north-west. He chaired the parliamentary inquiry into housing affordability, which is due to report this year.

(To John Alexander) Do you think we're seeing an entrenchment of a generational wealth divide in Australia?

JOHN ALEXANDER: Well, I think thi- this is a great concern. This is w- what personally, ah, drove this inquiry: because I have three children who would love to buy a home someday. And, er, every person I've ever door-knocked in this region has the same concern. And so: how do you, ah, give people the opportunity to buy homes?

BEN KNIGHT (voiceover): People like Jules.

Her generation is known as the 'millennials': those who were born from the 1980s onward.

They have a reputation as the "selfie" generation: narcissistic, entitled; the kids who got a trophy just for turning up.

But they've turned up too late to catch the housing boom.

John Daley from the Grattan Institute wrote the book on the generational divide in Australia.

JOHN DALEY, CEO, GRATTAN INSTITUTE: They're finding it clearly a lot harder to get into the housing market.

Twenty-five-to-34-year-olds: used to be about 60 per cent owned a, a house. Now it's less than half.

BEN KNIGHT (voiceover): The widening gap between house prices and wages has effectively shut millennials out of the housing market.

JOHN DALEY: Their choice is pretty stark: they either purchase on the edge, with all of the problems that that creates in terms of poor access to jobs; ah, or essentially they wind up, ah, if they are lucky, buying, ah, an apartment in the centre - or, more likely, renting.

BEN KNIGHT (voiceover): But their parents' generation wants millennials to know that they didn't have it easy either.

ANNIE, HOME OWNER: You don't start with a big TV. You don't start with the best car. You don't start with the best clothes.

STUART, HOME OWNER: Yes, I have my own house. But it's 40 years of work.

SALE, HOME OWNER: My husband and I were paying up to 18 per cent interest during the 90s. You have your own challenges.

ANNIE: You can't always have what you want, when you want it, where you want it.

JULES McKENDRY: It's not the same. The - like, the, the market now is not what the market was when the baby boomers were buying. You know, it's - everything is different.

(Archival footage of married couple inspecting house, early 1960s)

HUSBAND: I think the kitchen's beautiful, Manny. Don't you?

WIFE: Yes, well this is what I'm interested in: a kitchen. You need a big kitchen with drawers and cupboards. Oh, yes. They've got everything. Yes, this is all you need in here.

REAL ESTATE AGENT: Now, if you can tell me, er, what sort of money you have in cash?

HUSBAND: We could go up to 800.

REAL ESTATE AGENT: Eight hundred pounds.

BEN KNIGHT (voiceover): It was under Robert Menzies that home ownership took off in Australia: as an aspiration and a reality.

In 1947, less than 50 per cent of Australians owned, or were buying a home. Just over a decade later, that figure had jumped to 70 per cent.

(Excerpt from current affairs program, 1970s)

KERRY O'BRIEN, REPORTER (1970s): This is the preoccupation on any Sunday afternoon for tens of thousands of people across Australia.

BEN KNIGHT (voiceover): As the suburbs sprouted, we rushed into them. As the population kept growing, so did demand - especially in Sydney and Melbourne; especially from investors.

(Footage of Wayne Phillip painting as Karen Phillip browses house sales on her computer)

BEN KNIGHT (voiceover): Since they married 12 years ago, they've turned $100,000 into a $4.5 million property portfolio. And they've done it all from the dining room of their home on the New South Wales central coast.

KAREN PHILLIP: This one's in Newcastle. We purchased that three years ago. We purchased that, I think, for $325,000; did a little work on it. Ah, we had it valued recently for just over $500,000.

BEN KNIGHT: So that's done very well for you?

KAREN PHILLIP: Yes. Yeah, it has.

This was one of the first little ones I bought...

BEN KNIGHT (voiceover): It's a simple formula: borrow money, buy a property, rent it out and then sell at a profit. And they're very good at it.

KAREN PHILLIP: ...ah, we purchased it for $260,000...

WAYNE PHILLIP: Sixty, yeah.

KAREN PHILLIP: ...and sold it for $360,000 three years later.

BEN KNIGHT: It is horrifically ugly. (Laughs) How did you choose it?

KAREN PHILLIP (laughs): Ah...

WAYNE PHILLIP: Not on emotion. (Laughs)

KAREN PHILLIP: No. No, we don't ever buy on emotion.

WAYNE PHILLIP: Or logic. (Laughs)

KAREN PHILLIP: It's a house that we'd probably never live in.

Ah, this one...

BEN KNIGHT (voiceover): This is how you ride a housing boom.

KAREN PHILLIP: ...Coffs Harbour.

When we started, not only did we not see the places that we were buying because we saw them on the internet: we actually borrowed 105 per cent, using, ah, the equity we had in our house to fund that. So...

BEN KNIGHT: And just kept revaluing the ones and borrowing against those...

KAREN PHILLIP: Yep.

BEN KNIGHT: …and borrowing against those...

KAREN PHILLIP: Yep.

WAYNE PHILLIP: Yes.

BEN KNIGHT: ...and borrowing against those?

KAREN PHILLIP: Exactly right.

BEN KNIGHT: So how many houses have you bought and sold in all that time?

WAYNE PHILLIP: Well, ah: 18.

KAREN PHILLIP: Yeah, about- 'bout 18. We, we started buying...

BEN KNIGHT: That's like Monopoly figures.

(Karen and Wayne laugh)

It, it, it... I mean, when you think back on it and think: "Wow. How did we ever even do that?"

BEN KNIGHT: But you couldn't have done it without negative gearing?

WAYNE PHILLIP: No.

BEN KNIGHT: You're surprised more people don't do it?

KAREN PHILLIP: I am.

WAYNE PHILLIP: Well, yeah. Yes.

KAREN PHILLIP: I'm very surprised that they don't, they don't do it. Ah, but I don't think they know how to do it.

BEN KNIGHT (voiceover): To put it simply: negative gearing is a clever way of reducing your tax bill.

If you have an investment property and it's losing money, you can claim that loss as a tax deduction against everything else you earn.

Other countries do it too, but they're far less generous with their allowances.

In 1985, then treasurer Paul Keating called negative gearing an "outrageous rort" and tightened the rules.

But two years later, his decision was blamed for rising rents in Sydney. And with a NSW state election looming, the federal Cabinet brought negative gearing back.

Then in 1999, the deal got even sweeter when the Howard government halved capital gains tax. That meant investors could afford to lose even more money on the rent, claim it on their tax, then watch the property go up in value and cash in by selling.

BEN KNIGHT (voiceover): And you can see it taking effect. From 1999, owning property turned from a profit-making operation for investors into a massive loser for the government, taking billions each year out of the budget.

And each year, more and more investors jumped in.

JOHN ALEXANDER: We're travelling towards a market that's dominated by speculative investors and excluding the, the homebuyer. And too often it's the... young couple who get beaten out at the auction who is then renting that very place that they were trying to buy.

And so...

BEN KNIGHT (voiceover): In this development in John Alexander's electorate, investors own more than 25 per cent of the buildings. The developer says that's low by their standards: most schemes like this are more than 50 per cent investor-owned.

JOHN ALEXANDER: Negative gearing has worked very well when it has provided affordable rental properties. Ah, the moment that it intrudes on the marketplace and stops young families from buying the house: ah, that's, that's not ideal. And that's what's happened in this moment when interest rates have gotten so low.

So it's this new dynamic that's come into play that has deprived young people of being able to buy homes and has, you know, really created this spike.

KEN MORRISON, CEO, PROPERTY COUNCIL OF AUSTRALIA: No, we don't believe it has had a role in pushing up prices. It's not been the dominant part of the market.

BEN KNIGHT: It's been a fascinating...

(Voiceover) The Property Council of Australia is a big supporter of negative gearing.

KEN MORRISON: No, the- the- the big factor pushing up prices has been the chronic undersupply of housing for well over a decade and the failure of that supply pipeline to match the- the growing, our- our growing cities and our growing population.

BEN KNIGHT (voiceover): In his farewell speech to Parliament last October, the former treasurer, Joe Hockey, stunned his colleagues with some parting thoughts.

JOE HOCKEY (21 Oct. 2015): Negative gearing should be skewed towards new housing, so there is an incentive to add to the housing stock, rather than on- than an incentive to speculate on existing property.

(Ben Knight walks into Chris Bowen's office and shakes his hand)

BEN KNIGHT: How are you going?

CHRIS BOWEN, SHADOW TREASURER: Hello. Good to see you.

BEN KNIGHT: Thank you.

(Voiceover): Four months later, Labor announced its policy to do just that.

CHRIS BOWEN, SHADOW TREASURER: Investors are now 50 per cent of all home purchases. That's the highest that it's ever been.

Guess what: there's a link. There's a correlation. What we've gotta do is level the playing field. First homebuyers are turning up at auctions with no government support. Investors are turning up at auctions with the negative gearing policy in one pocket; with the capital gains tax discount in the other. And of course, investors are outbidding first homebuyers.

MALCOLM TURNBULL, PRIME MINISTER (23 Feb. 2016): You don't need to be a professor of economics to know

BEN KNIGHT (voiceover): As soon as Labor announced its policy, the Government was on the offensive.

MALCOLM TURNBULL (23 Feb. 2016): What does the Labor Party want to do? It wants to give the property market a kick in the guts. It wants to send those prices lower. It's going to be a pretty hard slog, I would say, defending a policy that is go- "Vote Labor and be poorer." That's what that- that'll be their sl... "Vote Labor and see your house price go down." That's what Labor's offering: lower house prices, poorer Australians.

SAMANTHA ARMYTAGE (Sunrise, Channel Seven, 24 Feb. 2016): The Prime Minister has been under attack over the Government's tax policy.

BEN KNIGHT (voiceover): But the Coalition muddled its message early, when the Assistant Treasurer said it would send house prices up.

KELLY O'DWYER, ASSISTANT TREASURER (Sunrise, Channel Seven, 24 Feb. 2016): They've got a policy that is going to increase the cost of housing for all Australians: for those people who currently own a home and for those people who would like to get into the housing market through the negative gearing policy.

MALCOLM TURNBULL (24 Feb. 2016): I can only assume that the Minister was referring to new housing, ah, which of course is a very small percentage of the housing stock.

JOHN ALEXANDER: It's up to prudent Government action, ah, and certainly not the rash, ah, proposal of the Labor Party to suggest that you'll only give negative gearing to new... new home construction, because that would just devastate the housing market. That would create a freefall. That would be devastating.

CHRIS BOWEN: Absolute rubbish. It's just a scare campaign. And, ah, what we need to do is: look at policies which really do make a difference on housing affordability.

But to claim that this would "devastate", as John Alexander says - and that's the Liberal Party talking points - is just a completely fallacious argument.

BEN KNIGHT (voiceover): John Daley says Labor's change would probably push house prices down, but not as much as the Government claims.

JOHN DALEY: Chances are: we would see property prices fall a little bit, relative to where they would be otherwise: maybe two per cent. So it's not a big change in the scheme of things. And at the margins, we would see slightly fewer investors and slightly more home owners.

BEN KNIGHT (voiceover): Actually, what Malcolm Turnbull called negative gearing was "tax avoidance", in a speech in 2005.

JEFF KENNETT: Er, I don't quite understand why he's now arguing against the p- proposition he put out before and supporting Labor. And I'm sure if Labor hadn't have introduced a policy, ah, on negative gearing, the conservatives would have; which is the great disappointment of politics today.

BEN KNIGHT: Why has the Prime Minister changed his view?

JEFF KENNETT: I think there's a very simple reason: it's all about winning the next election.

SCOTT MORRISON (24 Feb. 2016): It's a big fail from those opposite because they don't get it, Mr Speaker.

BEN KNIGHT: While the politicians argue, young homebuyers wait for something to change.

Extreme situations call for extreme measures - like moving back in with your parents.

(Ben knocks on door of house)

GERRY HOLMES: Hello.

BEN KNIGHT: Hi, Gerry. How are you?

GERRY HOLMES: Good, thanks, Ben. How are you?

BEN KNIGHT: Yeah, yeah, well.

Come in.

BEN KNIGHT: Thank you.

(Voiceover) Gerry and Libby Holmes have a full house again, ever since their daughter Millie moved back in - and brought her new family with her.

(To Millie Robson) So you must be Millie?

MILLIE ROBSON: Yes.

BEN KNIGHT: You're Ben?

BEN ROBSON: Yeah.

MILLIE ROBSON: Yep. And this is Daisy.

BEN KNIGHT: That's Daisy?

MILLIE ROBSON: Yeah.

BEN KNIGHT (voiceover): He's a paramedic; she's a psychologist.

MILLIE ROBSON: Finishing school, we knew we had a H- a HECS debt. We knew we had... um, we knew we had to have a pretty good job to be able to then, um, save a deposit.

BEN ROBSON: Yeah.

MILLIE ROBSON: Um, I... I guess we probably just didn't realise it was going to be this hard.

BEN ROBSON: Even renting is quite- it's really expensive, so you can't sort of save and rent at the same time.

MILLIE ROBSON: We love it.

(Footage of Millie, Ben and Daisy in their room)

BEN KNIGHT: Do you retreat in here?

MILLIE ROBSON: Yeah.

BEN ROBSON: Yeah.

MILLIE ROBSON: We have our little domain...

BEN KNIGHT (voiceover): They're all now living in the room Millie slept in as a teenager.

MILLIE ROBSON: Yeah, we've got lots of space. We can't complain.

BEN ROBSON: No.

BEN KNIGHT (voiceover): There are now six adults and one baby under one roof. But no-one here's complaining.

GERRY HOLMES: Yeah. Well, as, ah, as I said before: it's, ah, it's a blessing to be able to have the whole family... in the one house - and the three generations as, as well. It's a... it's a really, um, exceptional experience that I know Libby and I are really enjoying.

MILLIE ROBSON: We'll just try and put away as much money as we can...

BEN ROBSON: Yep.

MILLIE ROBSON: ... and, and then see where we're at, hopefully when this... bubble bursts. (Laughs)

BEN ROBSON: Yeah, I think we'll get there. We'll get there.

BEN KNIGHT: So for you, that would a good thing?

MILLIE ROBSON: Yeah.

BEN ROBSON: For us: yeah, it would be. It would be for us. I mean, maybe not for... (laughs)

MILLIE ROBSON: Of course. Look at our smiles! (Laughs)

BEN KNIGHT (voiceover): Millie and Ben aren't the only ones who think there's a housing bubble.

STEVE KEEN, PROF., ECONOMIST, KINGSTON UNIVERSITY, LONDON: It's a bubble. It's a Ponzi scheme like- and like, like all Ponzi schemes or like all bubbles, it's driven by people taking out debt.

(Footage of Professor Steve Keen during charity walk, 2010)

BEN KNIGHT (voiceover): Steve Keen has predicted a crash before - and he's been spectacularly wrong.

STEVE KEEN (2010): I love the look of the balloons.

BEN KNIGHT (voiceover): In 2010 he walked from Canberra to Mt Kosciusko, after losing a bet that Australian house prices would fall by up to 40 per cent.

He says the only thing he got wrong was the timing.

STEVE KEEN: So we've actually managed to keep it going, but we've only done it by boosting our mortgage debt to the highest level in the Western world.

BEN KNIGHT (voiceover): To a record $1.5 trillion.

Mortgage debt is now equivalent in value to 94 per cent of Australia's GDP. Australian banks are more exposed to the mortgage market than in any other country.

John Alexander also compares the housing market here to a Ponzi scheme.

JOHN ALEXANDER: A Ponzi scheme is based on: that there will be new people coming into the market all the time, willing to buy; that it's solely based on the fact that the market will always go up. Well, that's what investors who are borrowing at 100 per cent are relying on.

(Footage of house being demolished)

BEN KNIGHT: As a visual metaphor, it's probably a bit clunky. But the point about a Ponzi scheme is: once everyone stops buying in, it all comes crashing down.

BEN KNIGHT (voiceover): Amy Reynolds is a strategist with a Singapore-based capital fund. It's one of the funds that's shorting Australia's banks: a multi-million dollar stock market play, betting that Australia's banking sector is headed for a fall from its exposure to the mortgage market.

AMY REYNOLDS: According to pretty much any housing market indicator you want to look at, house prices in Australia are significantly overvalued.

And we see it as having deviated from normal values and long-term averages by about 40 per cent. So we're expecting this kind of fall to take place in the housing market.

Then we've got things like...

BEN KNIGHT (voiceover): She's talking about indicators like the price-to-rent ratio, debt-to-GDP, the proportion of investor loans - at levels close to, or above, where they were in other countries before their housing markets collapsed.

Most of all, the price-to-income ratio: the gulf between what houses cost and what people actually earn.

In Ireland, the price-to-income ratio was 8:1, just before its housing market collapsed. In the US, it was five.

In Sydney, it's now 12.2 times the median salary. In Melbourne, it's almost 10.

But John Daley says the Australian market is different.

JOHN DALEY: We have a rapidly growing population. That means that there's this underpinned demand for housing that, say for example, Spain did not have.

We also have a much better regulatory system. And if you look at the fundamentals in terms of, ah, how much you have to pay to buy into the housing market, um, given current interest rates: it doesn't look wildly out of kilter with the past, so long as interest rates don't go up - and that's the big "if."

BEN KNIGHT (voiceover): But last month, The Economist magazine also calculated that the Australian housing market was overvalued by 40 per cent.

The OECD has warned of a sharp correction.

REPORTER (ABC TV news, archive): Over the past year, Sydney house prices gained more than 14 per cent; Melbourne, just over eight.

BEN KNIGHT (voiceover): Last year, Treasury secretary John Fraser was warning of a bubble in parts of Sydney and Melbourne.

JOHN FRASER, SECRETARY, DEPT. OF THE TREASURY (1 June 2015): Certainly, I think the case in the, ah, higher-priced areas of Melbourne.

BEN KNIGHT (voiceover): It's in Melbourne you can see the bubble before your eyes: in the explosion of high-rise apartments, fuelled by investment, that buyer's advocate Catherine Cashmore says are largely empty.

CATHERINE CASHMORE: I have walked through so many buildings where there have been a large number of empty apartments. And it's clear that, that people are buying them and they're not interested in renting them out. And it just seemed counterintuitive. But the rents, the yields in Melbourne are so low.

(Footage of Ben Knight in Eureka Tower, Melbourne)

BEN KNIGHT: It's really only when you get up to this kind of height that you get a sense of just how incredible the scale of building has been, especially here in Melbourne. And the numbers are phenomenal.

(Voiceover) Melbourne has added around 13,000 new apartments each year for the last two years, that have lost value before anyone even turned a key in the lock.

Now, in the next two years that figure is going to rise to 22,000 apartments. It's a hell of a lot in a market that's already saturated.

(Catherine Cashmore and Ben Knight walk through new high-rise construction developments in inner Melbourne at night.)

CATHERINE CASHMORE: Take a look over there: there's your office block. And over here: these are the apartments that: you can see that there's no lights on. There's only a handful of properties in here where the lights are on. And this is the evidence that's showing, really, that the lights are off and nobody's home.

BEN KNIGHT: But that's significant, because it's 8 o'clock on a Tuesday night. We're so close to the CBD of Melbourne that if anyone was going to be home, they'd be off that tram now. But they're not. It's, it's... it's basically empty.

CATHERINE CASHMORE: Yep. That's, ah, that's right. These properties are not fully occupied. They are vacant.

BEN KNIGHT (voiceover): It wasn't supposed to be this way.

The state governments' planning blueprints for both Sydney and Melbourne assumed that empty-nesters would downsize into apartments and leave their houses in the suburbs behind, opening them up for young homebuyers.

But the empty nesters aren't coming.

JEFF KENNETT: We're still building units that, to be quite honest, you wouldn't put your dog in. I mean, some of these one-bedroom... vertical fridges are appalling. And I couldn't imagine anything worse. Th- that's why I'm so opposed (laughs) to downsizing.

STEVE KEEN: Now, there could be lots of developers who end up being unable to sell their, um, their, ah, off-the-plan properties and going bankrupt.

JEFF KENNETT: I think we're in for a crunch: there's no doubt about that at all.

(Footage of Liz Moss reading contract)

LIZ MOSS: So we fought hard for this.

BEN KNIGHT (voiceover): Yet still people are banging down the door to get into the market.

Liz Moss has just signed the paperwork on her third investment property on the outskirts of Melbourne.

LIZ MOSS: Yeah, I just started my third investment property: just signed the paperwork for it.

(Footage of Liz Moss signing contract)

BEN KNIGHT (voiceover): She now owes the bank more than $1 million.

LIZ MOSS: Five-forty, $290,000 and - I'm not really good with maths all in my head - but I've just over: what, $1.2 million? Something like that? Does that sound about right, altogether? Yeah.

LIZ MOSS: I don't really want to just buy property for the sake of it. I h- I have to. For the only reason- I'm putting everything in to property because it really is the only way for me to, ah, set something up for my future.

I've worked in commission sales a lot and so I- I don't have a lot of superannuation. Unless I have some sort of assets behind me by the time I retire, I- I'm not going to have anything. Just absolutely nothing to live on, because obviously the pensions are going and all that sort of thing.

BEN KNIGHT (voiceover): Salesman Bruce Lewis says, out here, he's inundated with buyers: buyers who he knows are stretching themselves to the limit.

BRUCE LEWIS, REAL ESTATE AGENT, KAIKURA LAND SALES: A lot of people will come in and go, "The bank will give us this much." And as a salesperson I probably should say, "Thanks very much."

But generally what you find yourself doing is going, "You should maybe downsize. Allow for the rainy day: you know, one, one income."

Um, but the kids come in and they can- whatever they can borrow, they'll generally do, which is pretty scary. So…

BEN KNIGHT: Well, it is because...

BRUCE LEWIS: If interest rates go up, they don't make those allowances. So...

BEN KNIGHT: How far do you think interest rates would have to move before we see real problems?

BRUCE LEWIS: Wouldn't be much. I-I... I'd say one per cent would probably hurt a lot of people. Yeah.

BEN KNIGHT (voiceover): And consumer activists say banks and brokers have also been signing people up for mortgages they can never afford - without their knowledge.

LINDSAY DAVID, FOUNDER, LF ECONOMICS: There's a lot of evidence that, that we've come across that banks are actually fudging the loan application forms of, of borrowers to make them look a lot more credit-worthy than what they really are.

BEN KNIGHT (voiceover): Economist Lindsay David has presented more than 1,100 examples of altered loan forms to the Parliament. He says it shows that banks are engaged in predatory - even fraudulent - lending.

LINDSAY DAVID: The banks are actually using, literally using Liquid Paper or other types of ways to clear out the, the income of a... the income of a loan a- applicant and, and raise it.

They're lending to homebuyers that have no ability to be able to pay off their loan. And they're basically depending on the property market to continue to, to rise at a consistent rate.

BEN KNIGHT (voiceover): And we didn't have to go too far to find someone who'd had their loan application changed by a bank.

ELYSSE MORGAN, BUSINESS REPORTER, ABC: And that's all for The Business. I'm Elysse Morgan. Thanks for watching.

(Elysse rises from news desk and walks off)

BEN KNIGHT (voiceover): When ABC business reporter Elysse Morgan got her loan documents back from the bank for signing, she found something wasn't right.

(To Elysse Morgan) So what did you spot?

ELYSSE MORGAN: Oh, we spotted that my income had been massively inflated to what it normally is. There's a line that says, "Your monthly income." It was correct for my husband's. And then for mine, it was inflated by around 38 per cent.

BEN KNIGHT (voiceover): She says she never found out who changed the figures on her loan application.

(To Elysse Morgan) What were they thinking: trying this not just on any member of the public, but an ABC business journalist?

ELYSSE MORGAN: As a business journalist... you have to think to yourself, "What's in the interest of the organization or the institution to pump that up?"

I'm on a pretty good salary. So you've only got to think to yourself: are they taking it from, say, a AA to a AAA rating? Ah, is it more convenient for them to have those sorts of figures? I don't know. *[See Editor's Note below]

BEN KNIGHT (voiceover): Which is exactly what Lindsay David says is going on.

LINDSAY DAVID: If the banks show the international investment community that they're lending to very, very credible borrowers - ah, credit-worthy borrowers - then it's very, very easy for the banks to tap into very cheap debt and to be able to sell off residential mortgage-backed securities with a AAA rating.

Ah, for one reason or another our politicians do not want to touch this. Er, ASIC does not want to touch this. And basically, ah, that is a- a serious problem, because we know that the mortgage market in this country is contaminated with junk debt.

BEN KNIGHT (voiceover): Bank behaviour is now firmly in the spotlight.

The Government has restored more than $120 million of funding to the corporate watchdog ASIC - and the Prime Minister has warned the banks to lift their game.

Last year, the banking regulator APRA finally acted to rein in bank lending to investors, limiting loans to 80 per cent of a property's value and making it harder for people to qualify.

That change has undoubtedly slowed the market down. House prices in Sydney have dropped for the second straight quarter. Melbourne is still rising, but at just over one per cent.

JOHN ALEXANDER: This is the beginning of things calming, which is a good thing.

BEN KNIGHT (voiceover): Here's what the Great Australian Dream looks like in 2016.

(Ben Knight walks through streets of Mernda, north-eastern Melbourne)

BEN KNIGHT: This is Mernda, on the outskirts of Melbourne - or what's currently the outskirts of Melbourne. It's about 30 kilometres from the CBD. But if you're commuting, it's more like two hours in and two hours back out again at peak hour. And people do do it.

In the last five years, the median house price here has doubled. It's now more than $400,000.

And one of the things that's pushed the prices up is because, in these outer-growth suburbs, people who are looking to buy a home are, more than anywhere else, competing against investors.

Around a third of the houses and more than half of the units are being bought by people who will probably never live in them.

(Voiceover) You can still get a house and land for $300,000 or $400,000. But you're not getting much. Houses are squeezed onto ever-shrinking blocks of land. The rental units are even smaller.

ANDREW KYRIACOU, MERNDA RESIDENT: I mean, they're tiny, mate, you know? Like, I rented down there and, I mean, you can basically hear your- your neighbours coughing. Th- that's how close the houses are these days.

And I just keep - it was jammed in here.

BEN KNIGHT (voiceover): Andrew Kyriacou has just bought his first house...

They're all - everyone, they're - all these builders: they don't care. They make their money. They don't care about us. We... It's like we're scrap, mate. You know, we're…

Our kids: I feel sorry for my kids. By the time they get older, the houses are gonna be - God knows how much the houses are gonna be.

BEN KNIGHT (voiceover): Jules McKendry is hoping today's the day she buys her first home.

AUCTIONEER: Got the cheque book?

JULES MCKENDRY: Yes. Of course. (Laughs)

AUCTIONEER: Good girl.

BEN KNIGHT (voiceover): She's back at the house in Kilsyth for auction day.

JULES MCKENDRY: OK. And how short (inaudible)

BEN KNIGHT (voiceover): It's been quoted in the high $400,000 range. But no-one believes it'll sell for that.

(To Jules) So, what's your limit?

JULES MCKENDRY: Ah, probably $559,000.

BEN KNIGHT: Five hundred and fifty-nine?

JULES MCKENDRY: Yep. Yep.

BEN KNIGHT: Yeah? That's very specific.

JULES MCKENDRY: Yep. Well, you have to be 'cause you need to know your limits and you need to not go over it. And, you know: just under $560,000. That way it's not... you know, just over $560,000. Yeah.

BEN KNIGHT: Yeah. Oh well, you know how it works in your head.

(Jules laughs)

(Footage of auction)

AUCTIONEER: I'm now in your hands. A fair and opening bid: folks, I'm in your hands.

BEN KNIGHT (voiceover): And it's Jules who gets things going.

JULES MCKENDRY: Five hundred.

AUCTIONEER: At 500, welcome to the bidding.

BEN KNIGHT (voiceover): It's moving quickly.

AUCTIONEER: Five-ten I have, straight back at 520. At 510, 520, 530. Five-twenty on the left. Five-twenty on the left: 530 if you will. Five-thirty I have; 540 on the nod. Five-fifty there: come back at 560? Same opportunity.

Five-fifty.

BEN KNIGHT (voiceover): To stay in, Jules will have to go over her limit.

AUCTIONEER: At $560,000 now in the middle. First call, 560.

BEN KNIGHT (voiceover): And that's it: blown out of the water in less than a minute.

AUCTIONEER: We are selling...

BEN KNIGHT (voiceover): At the final hammer, Jules is more than 30 grand short.

AUCTIONEER: Going... we are selling... we are selling - we are sold at $592,000. Congratulation. To the other bidders: commiserations. Thank you for your bidding. Have a talk to the guys. And thank you for attending Stockdale and Leggo auction here today.

BEN KNIGHT (to Jules McKendry): You took it up there pretty quickly, but it just kept going, didn't it?

BEN KNIGHT: And you knew you were up against - I think there were a few investors in the bidding there, weren't there?

JULES: Yeah. So the, um... the builder that I was next to, that was up against the fence: he, like, he's a builder. And then the guy at the back was a builder as well.

And remember her prediction about this house?

(Reprise of footage from earlier in program)

JULES McKENDRY: I think if we- ah, we won't purchase this house or a young couple doesn't purchase this house: I think less two years from now there'll be a house in the backyard.

(Reprise ends)

(Jules speaks with successful bidder)

JULES McKENDRY: I can't help but notice when we got here, you were measuring the driveway.

BEN KNIGHT (voiceover): She was spot-on.

SUCCESSFUL BIDDER: We do have future... ah, what do you call - plan of subdivision...

JULES McKENDRY: Subdivision?

SUCCESSFUL BIDDER: ...subdivision and investment.

AUCTIONEER: Well done, guys.

SUCCESSFUL BIDDER: Cheers, mate.

BEN KNIGHT (to Jules McKendry): But once again, you know, you've, you've lost out to people who are here with a different agenda?

JULES McKENDRY: Yeah. Yeah. Well, that's what it is.

Yeah, I suppose a little disappointed, a little bit upset, but... you know, I'll find the right one.

Or, alternatively, I just blow all of my savings and go travel, but... (laughs) I'll keep at it.

BEN KNIGHT: I don't think you're going to do that.

JULES McKENDRY: Nah. (Laughs)

BEN KNIGHT: What do you do now?

JULES McKENDRY: Just keep lookin'.

END

*EDITOR'S NOTE: This story has been edited to remove references to the financial institution from whom Ms Morgan received her loan. The exact circumstances of the changes to her application cannot be established.